Vonovia SE

XETRA:VNA

Q1-2025 Earnings Call

[Operator]

Ladies and gentlemen, welcome to the Vonovia Q1 Results Conference Call. I am Youssef, the Chorus Call operator. [Operator Instructions] This conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions]

At this time, it's my pleasure to hand over to Rene. Please go ahead.

[Rene Hoffmann, executive]

Thank you very much, Youssef, and welcome, everybody to our Q1 2025 earnings call. Our speakers today are once again, CEO, Rolf Buch; and CFO, Philip Grosse. They will be happy to lead through today's presentation and then answer your questions as usual. Over to you, Rolf.

[Rolf Buch, executive]

Thank you very much, Philip (sic) [ Rene ], and good afternoon also from my side as well. Let me start as normal with the highlights. In terms of an update of the market in Q1, it is safe to say that things are going off to a good start. The positive momentum on the transaction market has carried over in the first quarter and was not impacted by the bund yield hike in early March. Transaction volume is much higher than in Q1 last year as investors' appetite remains healthy.

Uncertainty over tariffs and the wider economic appears to provide further support. In this context and against the backdrop of positive operating fundamentals that are as strong as ever, we had a very good start in the New year. Rent growth was up by 50 bps to 4.3%. Our 3 financial figures, adjusted EBITDA -- adjusted EBITDA and operating free cash flow are all up double digit year-on-year. Our debt KPIs are moving in the right direction as expected.

On Page 4, we are talking about the transaction market. Basically, all brokers published their data for Q1 in early April and the message is very similar. The transaction market in Q1 was strong with a 180% increase over Q1 '24. Demand from investors was high remaining uncertainties are residing and a variable price structure has emerged as market yields have stabilized. This is the kind of development that we have anticipated and it should be overall very supportive for our H1 valuation. And with this over to Philip.

[Philip Grosse, executive]

Thank you, Rolf. Page 5, very familiar overview of EBITDA, EBT and operating free cash flow. A couple of comments here. Adjusted EBITDA, as you can see, up 15%. That's very much driven by higher contribution of our 3 nonrental segments. On rental, the EBITDA was flat because while we had very strong rent growth, as you've seen, we also had about 9,000 units less than Q1 last year. Adjusted EBT also increased by 15% to almost EUR 480 million. Operating free cash flow grew by 43% to EUR 718 million. Here one word of caution. The dividend payments to Apollo, that is roughly EUR 150 million will be made only in Q2. So this needs to be taken into account when looking at full year estimate.

Now on the details for the segments. On the rental KPIs, that is on the next page 6. Most uneventful part of our earnings update. Organic rent growth was 4.3% year-on-year in Q1 with a market rent growth contribution of 2.9%. Vacancy remains low is only a feature of apartment modernization. Rent collection continues to run at very high rate, close to 100% and fluctuation hovers around 8% these days, a little lower for Q1. So no surprises at all here. Adjusted EBITDA was flat in the end because revenue loss that is almost EUR 20 million from about 9,000 fewer units compared to Q1 last year that largely absorbed the positive impact from our organic rent growth.

One word on the new government and their coalition agreements. Yes, they have agreed to extend the rental caps by 4 years instead of 2, as initially announced. But since we have conservatively assumed that the rent cap legislation will stay in place anyway that has no impact whatsoever on our projections. What is more important is the agreement of the new government to install a commission that will be tasked with reviewing rental regulation with a view towards enabling a more constructive approach that can be more supportive towards new construction.

What is extremely encouraging in my view here is that this commission is expected to be staffed with representatives from landlord and tenant associations. So [indiscernible] who understand where the problems lie and who should be able to come up with a fair approach that can better achieve what everybody increase is required, and that is, yes, more -- just more new construction.

So moving to Page 7 for the value-add segment. As you can see, both external and internal revenue was up from higher investment volume and higher energy sales to our tenants in terms of adjusted EBITDA that translated into more than EUR 38 million, which was more than 3x the contribution of Q1 last year. And while an individual quarter can always be more volatile, we are happy with the direction of travel towards our 2028 objective of seeing 9% to 12% contribution by our value-add segment to our adjusted EBITDA total.

Recurring sales here, we sold 689 units in Q1, that is almost 70% more than in Q1 2024. Margins were also up, if only slightly to 25%, so we are on a good track towards our medium-term ambition level of 30% to 35%. And more recently, we already see a shift in the right direction. As a reminder, going forward, the recurring sales segment will include contributions from our manage to green strategy. So we buy stranded assets and then modernize and sell them. Also here, a word on the new government. As most of you know, EUR 100 billion of the EUR 500 billion infrastructure plan will go towards climate transformation fund. And while it is not yet clear how that money will be allocated and how subsidies will work at the end effect that buildings are a major contributor towards CO2 emissions that suggest that an allocation towards the housing industry is very likely in the overall goal for Germany to reach its targets by 2045 to become climate neutral.

Moving to Page 9 on the Development Segment. Here, with the recent CBRE and HIH deals plus some smaller disposals, we have largely sold off our inventory, and we are currently in the process of refilling the pipeline as discussed previously. The Q1 2025 disposals were, to a large extent, land sales that saw closing in the first quarter. And if I look at the remainder of the year, the main contribution to the development EBITDA will probably come from further disposals of land plots.

The key focus for our development segment is the reduction in construction costs. The coalition agreement includes some promising initiatives to reduce costs, which hopefully will give some tailwinds, and we remain laser-focused on reducing the cost items that we can control. The lower the construction cost, the larger the addressable market for us for a product, which is, as you know, desperately needed.

So much for the segment results, let's turn to Page 10. When we speak about growth. The focus of investors has recently been on earnings growth only, and I don't blame them because we have just come out of more than 2 years of value declines. And during this period, many market participants seem to have forgotten that real estate generally delivers 2 types of equity returns, and this is earnings growth, but there's also organic value growth when market yields stabilize and rent growth translates into asset value appreciation.

On Page 10, we have broken down the individual components that influence total accounting or shareholder return. There are always 2 ways to look at it. They are the accounted at audited values, so NTA, and on this basis, the estimate annual accounting return until 2028 is around 9%. Reality, however, is different because an investor does not pay at least for now NTA for the shares, but some 40% less. And on that basis, the total annual shareholder return is estimated to be more in the region of 13%. In either case, it seems to me a pretty solid equity return for a low-risk BBB+ rated capital structure.

Moving to Page 11. We have updated the numbers to reflect the latest data as per Q1. The message here remains very clear. The huge gap between market reality and our rent levels, safeguard a multiyear, robust trajectory of rent growth. And that is, as you know, 4% plus a year. The initial yield is what it is, but without taking into account the all but guaranteed rent increase from here on, that yield is, in my view, pretty meaningless.

On Page 12, our debt KPIs. As asexpected, LTV and net debt-to-EBITDA evolving into the right direction with pro forma LTV of 45% and net debt-to-EBITDA of 14x. Again, here, one word of caution on the LTV. This figure is before dividend payments. ICR also remains in safe territory currently at 3.7x. And as we have said for the full year reporting, we will keep a strong focus on making sure that our debt KPIs are in line with the BBB+ rating criteria but this is mostly an organic development now as values stabilize and then grow again and possibly already with the H1 valuation update, and there's an increasing EBITDA supports the cash flow-based debt KPIs.

Last on guidance, there's not much to say. We have left it unchanged at this point, and we'll continue to monitor our progress as the year goes by. Q1 was, as you have seen, a very good start and makes us very confident about our near and medium-term goals. And with that, back to you, Rolf.

[Rolf Buch, executive]

Thank you, Philip. Before we go to the Q&A and probably the CEO change, let me repeat the main messages as I see them. Our operating business continue to run like a clockwork, strong rental growth, no real vacancy and essentially full rent collection. So absolutely no surprise here. Market fundamentals remain increasing favorable. There is no impact from the temporary bond yield hike. The transaction market is off to a good start in '25 and investors' appetite is healthy.

The environment bodes well overall for the H1 2025 valuation. And the appetite for safe haven assets with structural growth and stable cash flows in uncertain times appear to provide further support. As Philip said, we are confident about our '25 guidance and our '28 objectives.

Let me allow me also to say a few words to the CEO change at the end of the year '25. I turned 60 a few weeks ago. And Vonovia is in the beginning of a very long growth path. It's a cyclical business, and we are probably in the beginning of an upward trend. So strategy we have to develop with a wider management team has the potential to drive Vonovia into a new dimension. The new CEO, I think, should have the chance to shape the path from the beginning. And similar to my situation, back in 2013, it was the same. [indiscernible] at this time, was just finished grant refinancing, and I had the pleasure to go in a long-term positive development. And I think Luka deserves the same.

But there's also a new other argument. We have a completely new government elected yesterday. There is a new Minister of Construction and there is even though all the State Secretary and the Minister of Construction are changing. So it's a completely new team. And we have learned in the last year how important it is to build a long-term trustful relationship, and this takes time. And that's why I think it is best that the new CEO started now to build a trustful relationship to the new government especially for the housing sector.

And as you say, after coalition agreement is before the next coalition agreement, so it takes time and we have to prepare for the coalition agreement [ on 29 ], and this is a third argument. The last AGM under my original contract would have been in '27 and would have conseeded with the end of the term of the Supervisory Board Chair. Leaving the CEO succession unresolved until then, would constitute poor governance and put undue pressure on the potential next share and the succession process. And I'm convinced that we have found the ideal candidate. So about his -- Luka's capital market experience is better to you to judge. What I can judge is that Luka is a great personality. I personally would like to work together with him, but I'm sure that he is a good fit to the Vonovia remaining management team and the full Vonovia team.

He is a great character. As you know, I consider our business a B2C-driven subscription-based business. And the closest industry you can see to German housing is actually telco industry, as we have discussed several times. So obviously, working for Vodafone in a very prominent position is probably the best fit you can imagine. But also, the second Vonovia will have a very strong B2B element, and Luka's experience in SAP, which is a pure B2B company is very helpful and will help him to support the Vonovia team to develop the second Vonovia.

And by the way, all our processes are based on the SAP. So a fundamental understanding of digitalization and processes is definitely helpful to do this job. So I wish him all the best luck. I am highly committed to support the transaction. I will do everything what I can, and I know that it is your company. But for me, it sometimes feels my own little baby, and so I'm happy to give this baby to Luka to grow it to a bigger child. And -- but this is not the end. We still have a lot to do in the '25. My board members told me that this is not the time to relax. It's the time to use the speed now. So that's why I will even work harder than the years before to deliver as much as we can until the end of '25.

And just a remark before this call, I was in the team down there, and I met a few people, and they told me, Rolf, we know now that we will have no summer holidays because you will do everything to keep us busy until the end of '25. So don't be nervous. This company will deliver very carefully until end of '25 and of course, afterwards.

And with this, I think, back to Rene.

[Rene Hoffmann, executive]

Thank you very much, Rolf. Thank you very much, Philip. Before we go to the Q&A, a quick reminder. We will stick to our 2-question policies. So I kindly ask that you bear that in mind and respect this request. And with that, we're very much looking forward to your questions, and I'll give it back to you, sir, to open up the Q&A.

[Operator]

[Operator Instructions] The first question comes from Thomas Neuhold, Kepler Cheuvreux.

[Thomas Neuhold, analyst]

My 2 questions would be, firstly, on the new government policy to reduce construction costs and increase construction speed. What do you think is a realistic time frame before we get a change here? And how much do you think can construction costs really come down?

[Rolf Buch, executive]

I will give you the second afterwards. So I think they will speed up now. So it's in the coalition agreement. It's now our job. We have to put pressure that it will happen as fast as possible. And so I'm very optimistic. It's the first time that it really is a breakthrough. And -- but it's also on our side. We have to use the new freedom to design buildings in a different way. So also, we are working hard on this where we speak. So I'm optimistic that we will bring down the cost very soon. And you probably will see the first buildings starting construction in the serial modernization -- in the serial construction over the summer this year.

[Thomas Neuhold, analyst]

And my second question is you acquired roughly 1,100 units from quarter back in Q1. Can you provide more details on these transactions? What was the rationale for this?

[Philip Grosse, executive]

The answer is yes. But what we have essentially done is an asset debt swap. We have granted shareholder loans to quarter back, which we decided last year to restructure. And we essentially wiped out all shareholder loans, and in return, we received a portfolio of assets predominantly in Dresden and Leipzig, point one and point two, also a land bank essentially across Germany, but with a focus on bigger metropolitan areas.

[Thomas Neuhold, analyst]

And lastly, personal message to Rolf, all the best to you. I was surprised that you leave now already, and it was always a pleasure working together with you. All the best.

[Operator]

The next question comes from Thomas Rothaeusler, Deutsche Bank.

[Thomas Rothaeusler, analyst]

A couple of questions -- I have 2 questions actually. On the long-term growth plan, maybe you could provide some update here. I'm just wondering if you would consider any adjustments given the volatile market environment. And here, specifically on the development segment, what's your outlook here? And do you see any pickup of demand?

[Rolf Buch, executive]

So I think we have given you the long-term perspective. We have confirmed that we stick with our 28 objectives. So I can tell you that all these 10 parameters are running as planned and according to what we assume. You I think, also see in the presentation that we are going in the right direction. So it's not where we have to be in '28. But I think it's going in the direction. Especially for the development, I think the key parameter to get this on track and to deliver also the size is to reduce the price of the construction, because with 5,000, we have very small market with EUR 3,500 per square meter, there is actually an unlimited market for new buildings, which means actually a good potential to build a lot and to sell a lot.

So that's why I think this is a key factor. And as I told you before, with the [indiscernible] new regulation, this is helpful. And again, in summer, we will probably construct the first building, which are coming from factory. And there you will see that we are coming with this price target coming in close to the price target, and that's why we are optimistic that development business will pick up.

One word again anyhow, somebody in Germany has to build these houses, and I think it's a clear understanding of the new government that this has to happen. And that's why I consider also very positive this commission because it's the first time that a politician let professional people like tenant association and landlord association to develop a concept where we are restructuring the rental regulation that it fits the purpose. And the purpose is that everybody needs to have a chance to get an apartment into the big cities.

And the purpose is that the rent regulations allows landlords to invest -- actually allows you to give us money to invest. And that's why I think the new government is well aware that they have to a deliver situation where returns are what they need to be. So I'm very optimistic at the moment about this.

[Thomas Rothaeusler, analyst]

Okay. Second question is on property values. I mean, it's on radar beat on investment markets and also refer to good support for property valuations. I mean -- just wonder what's your base case scenario for this year? Is it stable yields? I think you mentioned that on the financial slide. And Philip I think you even said you expect higher values -- just to get a bit more color here.

[Philip Grosse, executive]

Yes. I mean you know, Thomas, we are not providing specific guidance on valuation, but let me say that much. We've seen a very constructive transaction market in Q1, and that continues. And obviously, being in early May, we have good visibility on what has happened so far. The next revaluation of our entire portfolio is due with H1 and I clearly expect that we will see a positive valuation result.

[Operator]

The next question comes from Jonathan Kownator, Goldman Sachs.

[Jonathan Kownator, analyst]

I just wanted to go back to the sort of ramp growth outlook in Page 10, just to try to understand how it is designed. So you start if we focus on the base on NTA part 6% on the adjusted EBITDA rental, then you say 5.5% on organic value growth from rent growth. Can you just highlight what is that number exactly? Is that returns numbers? Is it the increase in sort of EBITDA that you expect from rental going forward, which is a bit higher than your guidance? A bit more color on those numbers would be helpful, please.

[Philip Grosse, executive]

Yes. I mean if you look at the adjusted EBITDA rental, it's essentially that 4% rental growth over the next couple of years until 2028, and that in relation to the NTA or market cap, and that translated into an annual growth number, the same logic applies to organic value growth. So essentially, what we have done here is assuming stable yields, and using that assumption, you capitalize your rental growth and you deduct the CapEx, and that gives you that number. Yes, and that goes on for the non-rental, which I think we have also guided, so should be no bigger surprise in that non-rental is moving towards that EUR 700 million.

Interest cost is the refinancing of what is coming due. Our assumption here is 4% of refinancing costs. By way of update, currently for unsecured, we are pretty much at that 4%. For unsecured, we are a bit lower than that. So for 2025, we are even running a bit ahead of schedule because here we have assumed 4.3% in our budgeting, which is good.

Taxes, I think we have discussed in a bit more detail last time where we have been guiding towards cash taxes for our core business just inside 10% of total EBITDA. And if I come to the last item, minorities and others. Yes, minorities, as you know, is the roughly EUR 150 million for the JVs. We did 2 years ago with Apollo. On top, we have some rent blocker structures, EUR 50 million and subject to closing and the domination -- the registration of the domination and transfer agreement. There is that disposal to Apollo with another EUR 70 million and all of that adds up to the minorities. What comes on top and the other is stuff like consolidation effects, depreciation a couple of one-offs, and this is kind of a brief description of the various constituencies of that accounting or shareholder return whatever way you look at it.

[Jonathan Kownator, analyst]

Okay. Quite helpful. Just on -- obviously, noticed that you're increasing CapEx quite substantially. Is Q1 reflective of the run rate you're going to get, you're slightly above sort of run rate in terms of growth at 50% increase in CapEx. When -- so it's really -- so are you going to keep increasing? Are you going to maintain that speed roughly? And when do you expect that to -- what kind of work are you doing essentially? And when do you expect them essentially to feed into the organic growth, please?

[Philip Grosse, executive]

And in terms of CapEx, for now, no change in guidance, I do expect EUR 1.2 billion equally how that translates into organic rent growth. I think we are on a good path as you can see in Q1 numbers, but that's around 4%, probably kind of more chances to the upside than to the downside is still the right number, but you equally know that the rental growth we are capturing this year is very much because of investments we have done last year in terms of the noninvestment rental growth. So the increase in CapEx will only translate into organic rent growth roughly a year later.

[Jonathan Kownator, analyst]

Okay. Just one follow-up in terms of investments. So maintenance also went up. Can you give perhaps a bit of comment on whether this is a one-off or a more recurring level that you want to achieve?

[Philip Grosse, executive]

Q1 is certainly not the kind of increase I expect for the entire year here. You should simply not compare quarter-by-quarter. We will see a slight increase vis-a-vis last year, but not the kind of 9% we have seen in Q1.

[Operator]

The next question comes from Pierre-Emmanuel Clouard, Jefferies.

[Pierre-Emmanuel Clouard, analyst]

So the first one is on the active development activity. Can you remind us what is the gross margin excluding the land plot that you sold in Q1 -- that you finalized in Q1? And just to be sure, was the sale of this land already included in the guidance given at the beginning of the year?

[Philip Grosse, executive]

Basically, the disposal of the land plot was accounting for 85% of the profitability in Q1, so don't look at the gross margin. It's meaningless essentially because it's really distorted by what I consider kind of one-off. And your second question, this part of a deal which we have signed last year, which has only seen closing this year and as such, was visible and embedded in our guidance.

[Pierre-Emmanuel Clouard, analyst]

Okay. Understood. And the second one is a follow-up on that. So you mentioned, Philip, that you are expecting to realize further disposals of land plots in 2025. Can you quantify this level or not? And the way to put the question is, what figure is included in the guidance of 2025?

[Philip Grosse, executive]

We are not guiding by segments, but let me say that much, there's a bit more to come than what you've seen in Q1.

[Operator]

The next question comes from Paul May, Barclays.

[Paul May, analyst]

Just a couple of questions from me, and apologies, for any background noise in the airport at the moment. Could you let us know what the level of cash flow is within the value-add business? Meaning by that is the actual cash inflow into Vonovia. Is this just the external revenue less operating costs? And if you could provide a figure for that, that would be great. I'm just trying to understand as this segment grows, how much of it is actual cash flow? Because I think you do include it fully in your operating free cash flow. So just trying to understand that. And the second -- I'll just ask the second question after this, it would probably be easier.

[Philip Grosse, executive]

Yes. On value add, Paul, I'm not quite sure I understand your question because the investment really does not form part of that. So if at all, it's cash flow relevant is the profitability, less the profitability, which is consolidated out because it's essentially internal profitability, which you only see in the EBT -- sorry, only in the EBITDA, but not in the EBT. So if you look at the consolidation line, this is essentially the internal profitability of our value-add organization.

So in other words, EBT, minus consolidation effect is the net cash effect of the value add segment. Now on operating free cash flow, not quite sure I fully understand your question. Let me only repeat my kind of got of caution on the operating free cash flow that this has not yet seen the cash out for the 2 joint ventures with Apollo in which we entered 2023, and as we have been guiding before, that's EUR 140 million, EUR 150 million cash out that is still to come. Equally for roughly EUR 40 million, EUR 50 million of minority we have elsewhere and all of these are rent blockers is equally still to come. So in total, we kind of fall short, a quarter of EUR 200 million, which if you would have a linear development, you would have expected in Q1.

[Paul May, analyst]

Perfect. And then the second one is just on the CEO succession. Do you envisage it's probably very difficult to answer, but any change in strategy or view on capital structure from Luka coming in, obviously, coming from a sector that tends to have very, very low net debt-to-EBITDA versus coming into a sector that has very high net debt-to-EBITDA. I just wondered if you had any thoughts on his thought process there? And would you be presenting? Or will you be available at the Capital Markets Day for sort of analysts and investors to discuss with him? Or he is not going to be available on that day?

[Rolf Buch, executive]

No, I think my understanding is that he still has a job to do in Vodafone until the end of the year. So it doesn't make sense to bring him there. So the change will be in the end of the year. And I think then you can discuss with him. And to be very clear, the strategy is developed not only from the CEO, but was developed really with the wider management team. It's backed by the full management team. and that's why I would consider the strategic approach of this company very stable.

[Operator]

The next question comes from Bart Gysens, Morgan Stanley.

[Bart Gysens, analyst]

My question is on Slide 6 of your presentation, where you show what you report as organic rental growth and that has multiple components. I think most of us have been expecting the modernization and new construction part of that to start increasing. And clearly, that will at some point. But we've mainly seen an increase in the Mietspiegel, the actual organic part of your organic rental growth. So the Mietspiegel uplift has come from low 2s a year ago to now at the end of last year was 2.8%. Now it's gone even higher at 2.9%.

Can you give us a bit more color on how far or how high you think that can go because you've got, of course, maybe provide some color on how much of your portfolio is now already above or below the Mietspiegel, where Mietspiegels are coming out? And therefore, where you think that 2.9% can go to over the next year or 2, that would be great.

[Rolf Buch, executive]

So just -- and I think we're going to answer both together, Philip and my -- just to say I should not -- should not be so much a surprise. We always said that the Mietspiegel will reflect the inflation we have seen in the past now in the upcoming years. So that's why it should not be an effect. And we still have told you that the Kappungsgrenze, so the Kappungsgrenze effect where actually there is rent on the apartments, which we cannot put on the tenant, but it will come by time is, of course, also helping here. But keep in mind that this factor is even going up and not going down.

So we still have building a more -- a bigger cushion there. So yes, but I think it should not be a surprise that rental growth from -- organic rental growth should go up because this is what we said and which is the logical, if you look on the 6 years looking backward of the Mietspiegel.

[Philip Grosse, executive]

And to add, Buch, I don't expect the noninvestment driven growth to go beyond the 2.9%. In principle, we have -- and there is not an exact mathematic exercise now. But in principle, we have 50% of our stock of our apartments, which are already above the local comparable rent and as such, not eligible for these increases according to the Mietspiegels. Second, most of our apartments are in markets which are considered tight and where you cannot increase rents over a 3-year time period by more than 15%.

And that means per year max 5%. If you apply that to 50% of our portfolio, the maximum number should be around 2.5%. There's always a bit up and down. because, as I said, it's no pure mathematics. It depends kind of where you see rental increases and some other factors. But again, I don't expect that number to increase. And let me just repeat on the investment-driven part. We ramp up our investments, but the impact of that will only come with a year delay. And for development by the way, it's even longer.

[Bart Gysens, analyst]

But just to follow up on that. So you made it very clear that you said, well, if we get a Mietspiegel uplift on half of our portfolio, only, and it's about 5% spread over 2 years, that's about 2.5%. Am I right in saying than that's the level where you should settle towards longer term? Or do you also have some churn and therefore, capturing reversion. And that's basically the difference between the 2.5% and the 2.9% and therefore, it could stay at that high 2s? Or should we expect that to go back down to about 2.5%?

[Rolf Buch, executive]

You're right with the reletting and this depends on the churn. It depends also on which apartment is actually changing. So I think, as Philip has said, that 2.5% is fine. It can be a little bit higher. I think it should not be a surprise that is, at the moment, a little bit higher. But in the end, it's just a testament of timing because the higher rent Mietspiegel will lead to a higher none -- because of the Kappungsgrenze effect, it will stay on the part and so this gives just a timing effect.

[Operator]

The next question comes from [indiscernible] with Kempen.

[Unknown Analyst]

Now on the stranded assets, you're now moving to reporting it in recurring sales segment. Does this imply that you're already seeing opportunities to capitalize on via disposals? And -- as a follow-up, do you also see a 30% to 35% margin on these disposals.

[Rolf Buch, executive]

So first of all, we are not giving you an exact margin number, but we see a lot of buildings coming to the market. Not everything is relevant for us because we want to have -- we are very selective on locations, but the mechanic is relatively simple. There is a multiple uplift -- or multiple difference between renovated and non-renovated apartments. And there is also the uplift in rent, which comes on top, which is EUR 2 or EUR 3, mainly EUR 3. So there's these 2 effects, and this actually translates to a margin, and I can confirm you that we see a lot of potential, which can be acquired. But of course, we are very selective because of locations. And we are not in a hurry.

[Unknown Analyst]

Sorry, just to follow up. Does that mean that the 2,500 to 3,000 historical run rate is perhaps a bit too low if you consider also these assets.

[Rolf Buch, executive]

Don't mix it. It's a 2,500 and 3,000, we will do with the existing stock, has nothing to do with this buildings, which we are renovating. This comes on top. So the guidance is up to 3,500 by just using apartments with [indiscernible] portfolio.

[Operator]

[Operator Instructions] The next question comes from Andres Toome with Green Street.

[Andres Toome, analyst]

So first question is just on the capital allocation pathway. And of course, there's a lot of attention on the side businesses. But it seems like a lot of them come with a pretty low valuation multiple as well. I'm just wondering, is there anything else that could be potentially more attractive in terms of valuation potential? And that you're thinking about bolting on or scaling up in the future.

[Philip Grosse, executive]

I mean in terms of capital allocation, first and foremost, it's capital we allocate to our investment program with expected IRRs of 10%, which is financed from operating free cash flow. And that is what enables us to deliver the 4% plus growth in markets where we clearly have visibility which can absorb that growth. So if I got your question right, the notion of no yielding assets is kind of right, if you look at static yields. But in combination with our investment program organically funded the long-term growth trajectory we see of 10 years plus, which can absorb that kind of rental growth, market-driven plus through investment is basically driving the investment case and the yield/organic value growth going forward.

[Andres Toome, analyst]

Yes. So that's on the investment program. My question is more on different site businesses. A lot of it is development sort of related as well, which ultimately is a low multiple business, but seems to be getting a lot of attention now with the focus on developing out the site businesses. So my question is more about, is there anything else in the mix of different site businesses that you have that would warrant or could get a better valuation basically as a stand-alone business and would help

Vonovia's valuation in the future as well? Anything that could be bolted on or scaled up within, I guess?

[Philip Grosse, executive]

I'm still not sure I fully get your question. I mean what we're essentially driving is our service business. So everything outside rental which is value add, which is our privatization business, which is our development business, which will contribute by 2028, more than 20% of total EBITDA. And that if you look at the constituencies, most of them are less capital intense. More precisely on the development business, just to make sure this is for me always recycling of inventories in our development to sell business, which is the only one which is relevant towards EBITDA, which means, yes, we have initial capital tied in that business we develop, but then we sell and we use that money to fund new developments.

So by that, we control the capital intensity, if you will. And our target here is to make gross margins of at least 15%, which again, for a business or product which is desperately needed. There are many firms are actually struggling to fund the development and we are developing into a market where I do expect very little competing supply is for me attractive business, which is kind of outside your notion on valuation because that clearly depends on what prices people are willing to pay.

And if I look at that for new builds in metropolitan areas, which, by definition, come at market rents. The gross yields people are accepting these days are hovering around 4%. This is just where the market is. Not sure I fully answered your question, but I got it right, but hopefully, that provides a bit of background.

[Rolf Buch, executive]

So probably to add one thing and what we also have in the strategy is the second Vonovia which is actually a pure asset and property management service business. So it comes with a long stability of cash flow because you are normally signing long-term contracts, but it comes actually with nearly no investment. So that's why the yield is very difficult to calculate or it would be misleading because there's nearly no environment. Actually, there is no investment. So this is just a contribution.

[Andres Toome, analyst]

And then my second question would be just on the new CEO coming in, I guess you've had those discussions maybe with the Board, but what's the intention here? Or sort of what sort of innovation can the new CEO bring with his skill set into Vonovia?

[Rolf Buch, executive]

As I mentioned, of course, it's probably also not my old, but I can explain you just what I think is very helpful. So to run Vonovia, I'm a strong believer that you need to understand B2C business because it's a subscription-based long-term business. And this was the whole story and being actually working for in a very prominent one for Vodafone. It's probably the most closest industry you can compare the telco industry to our industry. So I think that he has a fundamental understanding how business-to-consumer business is working and versus SAP experience. He also definitely has a full understanding of processes, which is a very important element of the story because we think that we have the best platform.

For the second element, which I mentioned is that for the second Vonovia, we have to -- we need to have B2B capabilities and knowledge because there you are signing these people who own or who want to own big portfolios, but get them managed by Vonovia, and this is a pure B2B business. And for this, I think his experience SAP, which is a pure B2B company is very helpful. And this is something which I think Vonovia has to learn also in the future because this is a B2C company today. So that's why I think he can be very helpful. And on top of it, I think coming from the industry, he's coming from digitalization where he will drive the digitalization efforts, the AI efforts which we have here in the company forward. So I don't know if I answer your question properly, but this is my view on what the capabilities he will bring to the table.

[Operator]

The next question comes from Simon Stippig, Warburg Research.

[Simon Stippig, analyst]

First question would be in regard to the dividend. Is it fair to assume that future dividends will be stable or increasing. Why I'm asking that is for example, there's a variation in new fee liquidity available for distribution in the future. If I assume 2024 averages fall out in 2027. And secondly, would be in regard to capital allocation on Page 10, you showed quite attractive returns on market cap. So that poses the question to me. Wouldn't it be rational actually to invest in your own shares.

[Philip Grosse, executive]

Yes, Simon, on the question of dividends, it's 50% of EBT. And in terms of EBT, we have been guiding towards a growing EBT in kind of mid-single digit area over the next couple of years based on our strategic program. Second constituency of dividend is success liquidity. And here, you can assume with the ramp-up of our investments which is one driver also towards profitability. I wouldn't count on excess liquidity being distributable, so that's on your first question on share buyback.

Yes, look, in principle, you are right. Our stock is trading at a heavy discount. And if you look at the return parameters investment in our share would be a very profitable investment. That having said, what is lagging is the funding of that. And I still feel that our capital structure is going in the right direction. But it's, however, not where I want to have it. And what we first need to see is that our capital structure provides the headroom for that kind of additional investment because assuming additional debt to finance the share buyback is probably not the right way to put it in the current market.

[Simon Stippig, analyst]

Okay. One follow-up maybe in that regard, your capital structure, what KPI would you look at probably I assume LTV and what LTV level you would then consider as sustainable for you to potentially start looking at your own shares to buy back?

[Philip Grosse, executive]

It's not one, it's all 3. It's LTV, net debt-to-EBITDA and ICR. And my clear expectation is that we will see organic value growth. So LTV by capitalizing the value growth of our -- sorry, capitalizing the rental growth in asset depreciation should move towards the lower end of our guided range. Net debt-to-EBITDA with the various initiatives we put forward if we deliver on that, should move towards 10 and 11x. So one is basically keeping us disciplined going forward is going to be the ICR.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Rene for closing remarks.

[Rene Hoffmann, executive]

Thank you, Youssef, and thanks, everybody, for joining this Q1 call. We hope to see you over the next days and weeks as we hit the road. As always, any questions you know where to find us. And with that, have a great day, stay safe, happy and healthy and see you next time. Bye-bye.